Tax transparency and the sustainability drive

Companies integrating tax disclosures into sustainability efforts face a complex transparency challenge. David McGee explains why

Tax is becoming an increasingly important aspect of a company’s social responsibility and overall values. This is evident in its inclusion in sustainability reporting frameworks, such as the Corporate Sustainability Reporting Directive (CSRD).

The trend towards integrating tax disclosures into sustainability efforts indicates that companies face a complex and ongoing challenge regarding tax transparency and sustainability.

PwC’s 2024 Tax Transparency Report analysed the tax disclosures of all 20 companies listed on the main market of the Irish Stock Exchange (Euronext Dublin) to see how prepared they are for tax disclosures under the CSRD and how it affects their tax approach.

Tax policy approach

We found that companies primarily make tax disclosures through a tax strategy, also known as a company's approach to tax or tax policy. We discovered that 80 percent of companies mentioned tax in their broader sustainability reports, up 14 percent on last year.

This indicates that companies recognise the importance of tax as an environmental, social, and governance (ESG) metric in which their stakeholders are interested.

Additionally, one more company reported on tax with reference to the Global Reporting Initiative (GRI) 207 standard compared to last year.

However, few companies describe how their approach to tax links to their sustainability strategy. This may be due to simply not connecting the dots between tax and sustainability efforts.

The CSRD is still in its relative infancy and, as such, the number of companies reporting a link between their tax and sustainability strategy is expected to rise in the years ahead.

Broader implications

Integrating economic and social impacts into tax strategy reflects an organisation’s commitment to considering the broader implications of its actions beyond mere financial gains, including its impact on communities and the environment.

Here are some key steps businesses can take today:

1. Engage the board: Increasing investor pressure on tax means tax transparency is now a board-level issue. It is essential for your board, tax function and ESG teams to fully engage with this issue and to align tax practices with sustainability strategy.
2. Engage with your sustainability teams: Tax and sustainability teams should work closely to ensure that double materiality assessments carried out under the CSRD consider tax-related impact, risks and opportunities. This will contribute to informed decisions on the materiality of tax.
3. Prioritise your tax strategy: Prioritise creating a formal tax strategy to guide disclosures and to control the narrative regarding your company’s tax practices and transparency efforts.
4. Consider what, and to whom, you are reporting: Understand the material tax matters your stakeholders want to know about and why. Review your current disclosures to see if they align with stakeholder expectations and/or regulatory requirements. Consider clarity and context in communications to help your target audience understand what’s at stake.
5. Establish optimal reporting framework: Choose a reporting framework that aligns with your company's values and stakeholder interests. If you are using an existing framework like GRI for sustainability, align your tax disclosures accordingly.
6. Set up tax disclosure processes: Implement formal procedures and governance to uphold the integrity of both qualitative and quantitative tax disclosures. This helps to ensure accountability and consistency.

David McGee is Environmental, Social and Governance Leader with PwC Ireland